The General Election – How will it affect the UK Stock market?

With any election, anywhere in the world, there is no shortage of speculation about how the result will impact the stock market. But we believe investors are best served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions.

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants— including expectations about the outcome and impact of elections. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a general election.

The focus of each election changes but predictions about the outcome’s effect on the stock market focus on which party will be “better for the market” over the long run. The chart from Timeline shows the growth of £1 invested in the UK market since 1925 and covers 23 prime ministers across different parties.

History suggests that over the long run, the market has provided substantial returns regardless of who lives at Number 10. As we know, equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

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